Keeping Track of Your Basis
You should keep track of your basis in mutual fund shares because you need the basis to figure any gain or loss on the shares when you sell, exchange, or redeem them.
Original basis. As explained in the following paragraphs, original basis depends on how you acquired your shares.
Adjusted basis. As described later, under Adjusted Basis, your original basis is adjusted (increased or decreased) by certain events. You must keep accurate records of all events that affect basis so you can figure the proper amount of gain or loss.
Shares Acquired by Purchase
The original basis of mutual fund shares you bought is usually their cost or purchase price. The purchase price usually includes any commissions or load charges paid for the purchase.
Example. You bought 100 shares of Fund A for $10 a share. You paid a $50 commission to the broker for the purchase. Your cost basis for each share is $10.50 ($1,050 ÷ 100).
When you buy or sell shares in a fund, keep the confirmation statements you receive. The statements show the price you paid for the shares when you bought them and the price you received for the shares when you disposed of them. The information from the confirmation statement when you purchased the shares will help you figure your basis in the fund.
Commissions and load charges. The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. You can usually add acquisition fees and charges to your cost of the shares and thereby increase your basis. A fee paid to redeem the shares is usually a reduction in the redemption price (sales price).
You cannot add your entire acquisition fee or load charge to the cost of the mutual fund shares acquired if all of the following conditions apply.
- You get a reinvestment right because of the purchase of the shares or the payment of the fee or charge.
- You dispose of the shares within 90 days of the purchase date.
- You acquire new shares in the same mutual fund or another mutual fund, for which the fee or charge is reduced or waived because of the reinvestment right you got when you acquired the shares.
The amount of the original fee or charge in excess of the reduction in (3) is added to the cost of the original shares. The rest of the original fee or charge is added to the cost basis of the new shares (unless all three conditions above apply to the purchase of the new shares).
Reinvestment right.This is the right to acquire mutual fund shares in the same or another mutual fund without paying a fee or load charge, or by paying a reduced fee or load charge.
Shares Acquired by Reinvestment
The original cost basis of mutual fund shares you acquire by reinvesting your distributions is the amount of the distributions used to purchase each full or fractional share. This rule applies even if the distribution is an exempt-interest dividend that you do not report as income.
When you acquire shares through reinvestment, keep the statements that show each date, amount, and number of full or fractional shares purchased. Keep track of any adjustments to basis of the shares as they occur.
Generally, you must know the basis per share to compute gain or loss when you dispose of the shares. This is explained under Identifying the Shares Sold, later.
Shares Acquired by Gift
To determine your original basis of mutual fund shares you acquired by gift, you must know:
- The donor's adjusted basis,
- The date of the gift,
- The fair market value (the last quoted public redemption price) of the shares at the time of the gift, and
- Any gift tax paid on the gift of the shares.
Fair market value less than donor's adjusted basis.If the fair market value (FMV) of the shares at the time of the gift was less than the adjusted basis to the donor at the time of the gift, your basis for gain on their disposition is the donor's adjusted basis. Your basis for loss is the FMV of the shares at the time of the gift. In this situation, it is possible to sell the shares at neither a gain nor a loss because of the basis you have to use.
Example. You are given mutual fund shares with an adjusted basis of $10,000 at the time of the gift. The FMV of the shares at the time of the gift is $9,000. You later sell the shares for $9,500. The basis for figuring a gain is $10,000, so there is no gain. There also is no loss, since the basis for figuring a loss is $9,000. In this situation, you have neither a gain nor a loss.
Fair market value equal to or more than donor's adjusted basis.If the FMV of the shares at the time of the gift was equal to or more than the donor's adjusted basis at the time of the gift, your basis is the donor's adjusted basis at the time of the gift, plus all or part of any gift tax paid on the gift, depending on the date of the gift.
For information on figuring the amount of gift tax to add to your basis, see Property Received as a Gift in Publication 551, Basis of Assets.
Shares Acquired by Inheritance
If you inherited shares in a mutual fund, your original basis is generally the fair market value (FMV) (the last quoted public redemption price) on the date of the decedent's death, or the alternate valuation date if chosen for estate tax purposes.
Community property states. In community property states, you and your spouse generally are considered to each own half the estate (excluding separate property). If one spouse dies and at least half of the community interest is includible in the decedent's gross estate (whether or not the estate is required to file a return), the FMV of the community property at the date of death becomes the basis of both halves of the property.
For example, if the FMV of the entire community interest in a mutual fund is $100,000, the basis of the surviving spouse's half of the shares is $50,000. The basis of the heirs' half of the shares also is $50,000.
In determining the basis of assets acquired from a decedent, property held in joint tenancy is community property if its status was community property under state law.
Shares you gave the decedent.A different basis rule applies to inherited shares that you or your spouse gave the decedent within the one-year period ending on the date of the decedent's death if, on the date of the gift, the shares were appreciated property. In this situation, the basis of the inherited shares is the decedent's adjusted basis in them immediately before his or her death, rather than their FMV.
This basis rule also applies if the decedent's estate (or a trust of which the decedent was the grantor) sells the shares instead of distributing them to you, and you are entitled to the proceeds.
Appreciated property. Appreciated property is any property (including mutual fund shares) whose FMV is more than its adjusted basis.
Exceptions.This basis rule does not apply if the decedent died before 1982 or you gave the shares to the decedent before August 14, 1981.
Adjusted Basis
After you acquire mutual fund shares, you may need to make adjustments to your basis. The adjusted basis of your shares is your original basis (defined earlier), increased or reduced as described here.
Addition to basis.Increase the basis in your shares by the difference between the amount of undistributed capital gain you include in income and the tax considered paid by you on that income.
The mutual fund reports the amount of your undistributed capital gain in box 1a of Form 2439. You should keep Copy C of all Forms 2439 to show increases in the basis of your shares.
Reduction of basis.You must reduce your basis in your shares by any return of capital distributions that you receive from the fund.
The mutual fund reports the amount of any return of capital distributions in box 3 of Form 1099-DIV. You should keep the form to show the decrease in the basis of your shares.
No reduction of basis.You do not reduce your basis for distributions from the fund that are exempt-interest dividends.
Table 2. Mutual Fund Record
Mutual Fund |
Acquired 1 |
Adjustment to Basis Per Share |
Adjusted 2 Basis Per Share |
Sold or redeemed |
Date |
Number of Shares |
Cost Per Share |
Date |
Number of Shares |
| | | | |
| | | |
| | | | |
| | | |
| | | | |
| | | |
1 Include share received from reinvestment of distributions.
|
2 Cost plus or minus adjustments.
|
Table 2. This is a worksheet you can use to keep track of the adjusted basis of your mutual fund shares. Enter the cost per share when you acquire new shares and any adjustments to their basis when the adjustment occurs. This worksheet will help you figure the adjusted basis when you sell or redeem shares.
Sales, Exchanges, and Redemptions
When you sell or exchange your mutual fund shares, or if they are redeemed (a redemption), you will generally have a taxable gain or a deductible loss. This also applies to shares of a tax-exempt mutual fund. Sales, exchanges, and redemptions are all treated as sales of capital assets. The amount of the gain or loss is the difference between your adjusted basis (defined earlier) in the shares and the amount you realize from the sale, exchange, or redemption. This is explained further under Gains and Losses, later.
Sale.In general, a sale is a transfer of shares for money only.
Exchange. An exchange is a transfer of shares in return for other shares.
Redemption. A redemption occurs when a fund reacquires its shares from you in exchange for money or other property.
Recordkeeping. When there is a sale, exchange, or redemption of your shares in a fund, keep the confirmation statement you receive. The statement shows the price you received for the shares and other information you need to report gain or loss on your return.
Exchange of shares in one mutual fund for shares in another mutual fund. Any exchange of shares in one fund for shares in another fund is a taxable exchange. This is true even if you exchange shares in one fund for shares in another fund within the same family of funds. Report any gain or loss on the shares you gave up as a capital gain or loss in the year in which the exchange occurs. Usually, you can add any service charge or fee paid in connection with an exchange to the cost of the shares acquired. For an exception, see Commissions and load charges under Shares Acquired by Purchase, earlier.
Information returns. Mutual funds and brokers must report proceeds from sales, exchanges, or redemptions to the Internal Revenue Service. They must give each customer a written statement with that information by January 31 of the year following the calendar year the transaction occurred. Form 1099-B, or a substitute, may be used for this purpose.
Report your sales shown on Form(s) 1099-B (or substitute) on Schedule D (Form 1040) along with your other gains and losses. If the total of the sales price amounts reported on Form(s) 1099-B in box 2 is more than the total you report on lines 3 and 10 of Schedule D, attach a statement to your return explaining the difference.
Taxpayer identification number. You must give the broker your correct taxpayer identification number (TIN). Generally, an individual will use his or her social security number as the TIN.
If you do not provide your TIN, your broker is required to withhold tax on the gross proceeds of a transaction. For 2003, the withholding rate is 30%. In addition, you may be penalized.
Identifying the Shares Sold
To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficult. However, shares are generally acquired at various times, in various quantities, and at various prices. Therefore, figuring your basis can be more difficult. You can choose to use either a cost basis or an average basis to figure your gain or loss.
Cost Basis
You can figure your gain or loss using a cost basis only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund.
To figure cost basis, you can choose one of the following methods.
- Specific share identification.
- First-in first-out (FIFO).
Specific share identification.If you adequately identify the shares you sold, you can use the adjusted basis of those particular shares to figure your gain or loss.
You will adequately identify your mutual fund shares, even if you bought the shares in different lots at various prices and times, if you:
- Specify to your broker or other agent the particular shares to be sold or transferred at the time of the sale or transfer, and
- Receive confirmation of your specification from your broker in writing within a reasonable time.
The confirmation by the mutual fund must confirm that you instructed your broker to sell particular shares. You continue to have the burden of proving your basis in the specified shares at the time of sale or transfer.
First-in first-out (FIFO). If your shares were acquired at different times or at different prices and you cannot identify which shares you sold, use the basis of the shares you acquired first as the basis of the shares sold. In other words, the oldest shares you own are considered sold first. You should keep a separate record of each purchase and any dispositions of the shares until all shares purchased at the same time have been disposed of completely.
Table 3 illustrates the use of the FIFO method to figure the cost basis of shares sold, compared with the use of the single-category method to figure average basis (discussed next). Average Basis
You can figure your gain or loss using an average basis only if you acquired the shares at various times and prices, and you left the shares on deposit in an account handled by a custodian or agent who acquires or redeems those shares.
To figure average basis, you can use one of the following methods.
- Single-category method.
- Double-category method.
Once you elect to use an average basis, you must continue to use it for all accounts in the same fund. (You must also continue to use the same method.) However, you may use the cost basis (or a different method of figuring the average basis) for shares in other funds, even those within the same family of funds.
Example. You own two accounts that hold shares of the income fund issued by Company A. You also own 100 shares of the growth fund issued by Company A. If you elect to use average basis for the first account of the income fund, you must use average basis for the second account. However, you may use cost basis for the growth fund.
You may be able to find the average basis of your shares from information provided by the fund.
Single-category method. Under the single-category method, you find the average basis of all shares owned at the time of each disposition, regardless of how long you owned them. Include shares acquired with reinvested dividends or capital gain distributions.
Table 3 illustrates the use of the single-category method to figure the average basis of shares sold, compared with the use of the FIFO method to figure cost basis (discussed earlier).
Even though you include all unsold shares of a fund in a single category to compute average basis, you may have both short-term and long-term gains or losses when you sell these shares. To determine your holding period, the shares disposed of are considered to be those acquired first.
Example. You bought 400 shares in the LJO Mutual Fund: 200 shares on May 15, 2001, and 200 shares on May 15, 2002. On November 11, 2002, you sold 300 shares. The basis of all the shares sold is the same, but the holding period of 200 shares is long-term and the holding period of 100 shares is short-term.
How to figure the basis of shares sold. To figure the basis of shares you sell, use the steps in the following worksheet.
1) |
Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.) |
$ |
2) |
Enter the total number of shares you owned in the fund just before the sale. |
|
3)
|
Divide the amount on line 1 by the amount on line 2. This is your average basis per share.
|
$
|
4)
|
Enter the number of shares you sold.
|
|
5)
|
Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold.
|
$
|
Example 1. You bought 300 shares in the LJP Mutual Fund: 100 shares in 1999 for $1,000 ($10 per share); 100 shares in 2000 for $1,200 ($12 per share); and 100 shares in 2001 for $2,600 ($26 per share). Thus, the total cost of your shares was $4,800 ($1,000 + $1,200 + $2,600). On May 16, 2002, you sold 150 shares. The basis of shares you sold is $2,400 ($16 per share), figured as follows.
1)
|
Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.)
|
$4,800
|
2)
|
Enter the total number of shares you owned in the fund just before the sale.
|
300
|
3)
|
Divide the amount on line 1 by the amount on line 2. This is your average basis per share.
|
$16
|
4)
|
Enter the number of shares you sold.
|
150
|
5)
|
Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold.
|
$2,400
|
Remaining shares.The average basis of the shares you still hold after a sale of some of your shares is the same as the average basis of the shares sold. The next time you make a sale, your average basis will still be the same, unless you have acquired additional shares (or have made a subsequent adjustment to basis).
Example 2. Using the same facts as in Example 1, assume you sold an additional 50 shares on December 15, 2002. You would not recompute the average basis of the 150 shares you owned at that time because no shares were acquired or sold since the last sale; rather, your basis is the $16 per share figured earlier.
Example 3. Using the same facts as in Example 1, assume you bought an additional 150 shares at $14 a share on September 19, 2002, and then sold 50 shares on December 16, 2002. The total adjusted basis of all the shares you owned just before the sale is $4,500, figured as follows.
1)
|
Basis of remaining shares ($16 x 150)
|
$2,400
|
2)
|
Cost of shares acquired 9/19/02 ($14 x 150)
|
$2,100
|
3)
|
Total adjusted basis of all shares owned ($2,400 + $2,100)
|
$4,500
|
The basis of the shares sold is $750 ($15 a share), figured as follows.
|
1)
|
Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.)
|
$4,500
|
2)
|
Enter the total number of shares you owned in the fund just before the sale.
|
300
|
3)
|
Divide the amount on line 1 by the amount on line 2. This is your average basis per share.
|
$15
|
4)
|
Enter the number of shares you sold.
|
50
|
5)
|
Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold.
|
$�750
|
Double-category method. In the double-category method, all shares in an account at the time of each disposition are divided into two categories: short-term and long-term. Shares held one year or less are short-term. Shares held longer than one year are long-term.
The basis of each share in a category is the average basis for that category. This is the total remaining basis of all shares in that category at the time of disposition divided by the total shares in the category at that time. To use this method, you specify, to the custodian or agent handling your account, from which category the shares are to be sold or transferred. The custodian or agent must confirm in writing your specification. If you do not specify or receive confirmation, you must first charge the shares sold against the long-term category and then charge any remaining shares sold against the short-term category.
Changing categories.After you have held a mutual fund share for more than one year, you must transfer that share from the short-term category to the long-term category. The basis of a transferred share is its actual cost or other basis to you unless some of the shares in the short-term category have been disposed of. In that case, the basis of a transferred share is the average basis of the undisposed shares at the time of the most recent disposition from this category.
Making the choice.You choose to use the average basis of mutual fund shares by clearly showing on your income tax return, for each year the choice applies, that you used an average basis in reporting gain or loss from the sale or transfer of the shares. You must specify whether you used the single-category method or the double-category method in determining average basis. This choice is effective until you get permission from the IRS to revoke it.
Shares received as gift. If your account includes shares that you received by gift, and the fair market value of the shares at the time of the gift was not more than the donor's basis, special rules apply. You cannot choose to use the average basis for the account unless you submit a statement with your initial choice. It must state that the basis used in figuring the average basis of the gift shares will be the FMV at the time of the gift. This statement applies to gift shares received before and after making the choice, as long as the choice to use the average basis is in effect.
Table 3. How To Figure Basis of Shares Sold
This is an example showing two different ways to figure basis. It compares the cost basis using the FIFO method with the average basis using the single-category method. |
Date |
Action |
Share Price |
No. of Shares |
Total Shares Owned |
02/05/01 |
Invest $4,000 |
$25 |
160 |
160 |
08/06/01 |
Invest $4,800 |
$20 |
240 |
400 |
12/17/01 |
Reinvest $300 dividend |
$30 |
10 |
410 |
09/30/02 |
Sell $6,720 |
$32 |
210 |
200 |
| � |
COST BASIS (FIFO) |
To figure the basis of the 210 shares sold on 9/30/02, use the share price of the first 210 shares you bought, namely the 160 shares you purchased on 2/5/01 and 50 of those purchased on 8/6/01. |
| � |
|
$4,000 (cost of 160 shares on 2/5/01) |
| � |
|
+ $1,000 (cost of 50 shares on 8/6/01) |
| � |
Basis= |
$5,000 |
| � |
AVERAGE BASIS (single-category) |
To figure the basis of the 210 shares sold on 09/30/02, use the average basis of all 410 shares owned on 9/30/02. � � � |
| � |
|
$9,100 (cost of 410 shares) |
| � |
|
÷ 410 (number of shares) |
| � |
� |
$22.20 (average basis per share) |
| � |
| � |
� |
$22.20 |
| � |
� |
�210 |
| � |
Basis= |
$4,662 |
Previous | First | Next
Publication Index | 2002 Tax Help Archives | Tax Help Archives | Home
